The opinion of the court was delivered by: HOLTZOFF
This is a civil action brought by the United States against the Maryland and Virginia Milk Producers Association, Incorporated, under the antitrust laws, for injunctive and similar relief. While the complaint, which relates to the milk industry in the Washington Metropolitan area, is not technically divided into separate counts, it in effect sets forth three separate claims for relief or causes of action. The first cause of action charges an attempt to monopolize interstate trade and commerce in supplying milk for resale as fluid milk in the Washington Metropolitan area, comprising the District of Columbia and nearby regions of Maryland and Virginia. This cause of action is based on Section 2 of the Sherman Act, 15 U.S.C.A. § 2. The second cause of action charges a combination and conspiracy to eliminate and foreclose the competition above-mentioned by making and carrying out a contract for the transfer to the defendant of substantially all of the assets of a concern known as Embassy Dairy, Incorporated, which is a retail outlet for milk in the area. This cause of action is predicated on Sections 1 and 3 of the Sherman Act, 15 U.S.C.A. §§ 1, 3. The third cause of action which has been the subject matter of the present section of the trial, charges that the defendant on July 26, 1954, acquired substantially all of the assets of Embassy Dairy, Incorporated, and that the effects of this acquisition have been or may be substantially to lessen competition or to tend to create a monopoly in the production and sale of milk to dealers in the Washington Metropolitan area. This cause of action further charges that, with the same effect, the defendant on December 6, 1957, purchased and acquired all of the outstanding capital stock of Richfield Dairy Corporation and Simpson Brothers, Incorporated, which operated the Wakefield Dairy. This cause of action is founded on Section 7 of the Clayton Act, 15 U.S.C.A. § 18. The pertinent provision of that section is found in its first paragraph, and reads as follows:
'No corporation engaged in commerce shall acquire, directly or indirectly, the whole or any part of the stock or other share capital and no corporation subject to the jurisdiction of the Federal Trade Commission shall acquire the whole or any part of the assets of another corporation engaged also in commerce, where in any line of commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.'
The defendant is an agricultural cooperative association, having as members nearly two thousand milk producers, that is, persons operating dairy farms at which milk is produced. As an affirmative defense the defendant pleaded that it is immune and except from prosecution under the antitrust laws under Section 6 of the Clayton Act, 15 U.S.C.A. § 17, and Section 1 of the Capper-Volstead Act, 7 U.S.C.A. § 291. The Court directed a separate trial of this affirmative defense. The outcome of the separate trial was that the Court, D.C., 167 F.Supp. 45, reached the conclusion that the defense of immunity was valid as to the first cause of action, on the ground that activities of agricultural cooperative associations are expressly exempted by statute from prosecution under the antitrust laws, either in criminal or civil proceedings. The Court further held, however, that this immunity does not extend to contracts or combinations involving, in addition to agricultural cooperatives, any person or concern that is not an agricultural cooperative association and, therefore, not entitled to exemption. On this basis, the Court held that the defense of immunity did not apply to the second and the third causes of action. The Court further held that the Capper-Volstead Act did not exempt agricultural cooperative associations from the provisions of Section 7 of the Clayton Act, to which reference has been made.
The issues arising out of the third cause of action are now before the Court for decision. Section 7 of the Clayton Act, which has been heretofore quoted, as originally enacted was limited to acquisitions of capital stock. By an amendment enacted on December 29, 1950, the Act was extended so as to cover acquisitions of assets as well. In addition, the amendment generally broadened the phraseology of the statute. In 1950 it became sufficiently comprehensive and inclusive in its terms so as to bring under its ban both horizontal and vertical acquisitions, either of capital stock or of assets of other concerns. In this connection it might be said that by 'horizontal' acquisition is meant the acquisition or control of one competitor by another; while the word 'vertical' is applied to an acquisition or control by a concern in one echelon, of a concern in another echelon in the same line of trade or commerce, such as a transaction between a manufacturer and a jobber or between a wholesaler and a retailer or between a manufacturer or dealer and a customer.
The statute was construed recently by the Supreme Court in United States v. E. I. duPont de Nemours & Company, 353 U.S. 586, 77 S. Ct. 872, 1 L. Ed. 2d 1057. The facts of that case were unique. In 1917 duPont and Company acquired a considerable block of stock of General Motors Corporation. Obviously, the two corporations were not competitors and were not engaged in the same line of business. DuPont and Company, however, was selling certain commodities, such as fabrics, that were used in the manufacture of automobiles. Among the customers for these products was General Motors Corporation. The latter purchased some of these products from duPont and some from other manufacturers and dealers. In 1949 the Government brought a civil suit attacking the stock acquisition on the ground that it violated Section 7 of the Clayton Act, in that it tended to lessen competition between duPont and other dealers in similar products, all of whom were selling or endeavoring to sell their goods to General Motors Corporation. The Court held that the transaction violated Section 7 of the Clayton Act.
In discussing the construction to be accorded to the statute, the Court held that it was immaterial whether actual restraints or monopolies in fact resulted from a merger or an absorption condemned by the Clayton Act or in fact whether there was actually a substantial lessening of competition. The Court went even further and held that it was immaterial whether a substantial lessening of competition was intended. The test formulated in the duPont case was whether there was a reasonable probability that a substantial lessening of competition or a monopoly might result from the acquisition by one corporation of the capital stock or the assets of another corporation. On this point the Court said, 353 U.S. at page 589, 77 S. Ct. at page 875:
'The section is violated whether or not actual restraints or monopolies, or the substantial lessening of competition, have occurred or are intended.'
In order to be within the ban of the statute, it is, of course, necessary that there be reasonable probability of a lessening of competition or the creation of a monopoly within an area of effective competition. The market affected must be substantial and it must appear that competition may be foreclosed in a substantial share of that market. The Court expressly held that the Act applies both to horizontal and to vertical acquisitions.
So, too, the Court also indicated that the fact that all concerned acted honorably and fairly, each in the honest conviction that his actions were in the best interests of his own company, and without any design to overreach anyone, does not defeat the right of the Government to relief. Finally, the Court held, for the purposes of the case before it, that the test was whether at the time of the institution of the suit, and not necessarily at the time of the acquisition of the capital stock or assets, there was reasonable probability that the transaction was likely to result in the condemned restraints.
It must be observed that the duPont case was decided by a vote of four to two, with three members of the Court abstaining from participation. A query, therefore, arises whether this decision should be regarded only as res judicata as between the parties to it or whether it sets forth binding principles as well on the basis of stare decisis. We do not have the views of any five members of the Court on the questions decided in the duPont case.
The biggest bone of contention in that case, however, was whether the legality of the acquisition challenged by the Government may be judged by the situation existing as of the time of the institution of the suit instead of as of the date of the transaction. In the duPont case suit was instituted over thirty years subsequently to the transaction assailed by the Government. In this respect the case, if it should become a binding precedent, introduces a far-reaching innovation and a novel doctrine into the law, since ordinarily the validity of a person's acts or transactions is determined as of the date when they are performed or consummated and when the cause of action arises rather than as of some later time fortuitously or arbitrarily selected by the institution of suit. Fortunately, this is a question that does not concern us in the instant case, since here the Government contends that the challenged transaction was illegal as of its date, as well as of a subsequent time, and the Court is called upon to determine the issues as of the date of the original transaction and, of course, in the light of subsequent events. Moreover, unlike the suit in the duPont case, in this instance the action was brought within a reasonable time after the challenged transaction. The accused merger took place on July 26, 1954, and the original complaint in this case was filed on November 21, 1956.
Going on to the facts that must govern the disposition of this controversy, the case relates to the Washington Metropolitan area, as has been stated, which consists of the District of Columbia and nearby Maryland and Virginia. This area constitutes a separate market for the retail distribution of milk. The defendant, Maryland and Virginia Milk Producers Association, Incorporated, is a Maryland corporation, having its principal office in the District of Columbia. As has been stated, it is an agricultural cooperative association, having as members nearly two thousand dairy farmers, most of whom are located in Maryland and Virginia. The milk is delivered by the members to the defendant, which acts as the marketing agency for them. Most of the milk is sold eventually to dealers in the Washington Metropolitan area. The defendant also owns a plant at which it transforms surplus milk into various milk products, such as ice cream and powdered milk. The net worth of the defendant corporation is approximately five million dollars.
For the purpose of determining the price to be charged to customers and the price to be paid by the Association to its members, the milk is divided into three categories. So much as is resold to the ultimate consumers in liquid form is placed in Class I; so much as is converted into cream or cottage cheese forms Class II; and the balance, known as surplus milk, which is transformed into other by-products, such as ice cream and powdered milk, is denominated Class III. The commodity in Class I and Class II is known in the trade as fluid milk. Different prices are charged to the customer for milk in each of the three groups, Class I receiving the highest and Class III receiving the lowest price. Since all milk delivered to the Association by its members forms a single pool, figuratively speaking, out of which all sales are made, it is impossible to allocate specific quantities to each of the three classes out of each member's contribution. Accordingly, a so-called 'blend' price is ascertained on the basis of the proportions of total sales made by the Association in each class out of the aggregate amount sold during a specified period. The Association then pays its members on the basis of the 'blend' price, after deducting a percentage, of course, for its maintenance and operating expenses. Manifestly, the more milk that can be sold in Class I and the less in Class III, the greater will be the 'blend' price and the more profitable the returns to the members.
A considerable quantity of milk supplied by defendant to its customer-dealers was resold to the Government for use by personnel at Government establishments within the Washington Metropolitan area, such as military and naval stations, Government hospitals, and other institutions. These sales were made by contracts based on competitive bidding. This aspect of the industry, though minor in proportion, was nevertheless of some importance, as Government purchases in the market amounted to about two million dollars a year.
In the Washington Metropolitan area approximately 86 per cent of all sales of fluid milk to dealers were made by the defendant, and about 45 per cent of sales to Federal establishments were made by dealers who procured their supply from the defendant. There were about a dozen dealers, or dairies as they are sometimes called, in the area. All but four purchased the bulk of their supply of fluid milk from the defendant. Among them were the three largest dairies. Embassy Dairy, Incorporated, the fourth largest, was an independent concern and did not buy from the defendant but procured its supply directly from farmers who, in turn, did not sell to the defendant. Wakefield Dairy, a smaller establishment, followed the same course as Embassy.
Embassy sold to Federal installations over 47 per cent of all Government purchases as against about 45 per cent supplied by dealers who, in turn, purchased from the defendant. Embassy obtained such a large share of the Government business by cutting prices and frequently submitting bids lower than those of defendant's dealer customers. Embassy bought its milk from about 122 independent dairy farmers, as against the almost 2000 farmers who were members of the defendant Association. The purchases of Embassy for resale as fluid milk amounted to about 9.5 per cent of the milk supply reaching the Washington Metropolitan area.
In the spring of 1954 negotiations were initiated between the defendant and Embassy Dairy, Incorporated, for the acquisition of all of the assets of Embassy Dairy by the defendant Association. While the Government is not required to establish the defendant's motive or intent in entering into this transaction, nevertheless, evidence of motive or intent is admissible as it may possibly cast an illuminating light on what actually transpired. Chief Justice Hughes said, in Texas & ...